Navigating the crises in European energy: Price Inflation, Marginal Cost Pricing, and Principles for Electricity Market Redesign in an Era of Low-Carbon Transition

Michael Grubb

No inetwp191, Working Papers Series from Institute for New Economic Thinking

Abstract: The energy crisis engulfing Europe is a crisis of both gas and electricity markets, with huge cost impacts on consumers across all European countries. In Britain, half of typical household energy expenditure arises from electricity. This paper examines how the cost of gas-powered generation feeds through to electricity bills, on the principle of marginal cost pricing, setting the price for most of the time though it accounts for only about 40% of GB generation. Combined with the steep decline in wind and solar costs over the past decade, this has resulted in an unprecedented degree of 'cost inversion' in the electricity system. We offer estimates of the increase of revenues across the wholesale market, and outline five principles for reform for addressing the combined challenges of energy costs and accelerating low-carbon transition.

Keywords: Electricity market design; energy crisis; marginal cost pricing; energy transition; energy poverty (search for similar items in EconPapers)
JEL-codes: L16 L51 L94 L98 Q28 Q4 Q58 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2022-09-06
New Economics Papers: this item is included in nep-eec, nep-ene and nep-reg
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Citations: View citations in EconPapers (2)

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4210683 First version, 2022 (text/html)

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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp191

DOI: 10.36687/inetwp191

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